The Invisible Hand

Today’s announcement by Bank of America is the second in a series of recent rational decisions by private entities seeking to address some of the concerns that exist in the markets.

Bank of America to Modify Mortgages, Help Homeowners

Bank of America Corp., seeking approval of its Countrywide Financial Corp. takeover, said it will modify at least $40 billion in troubled mortgage loans over the next two years to keep customers in their homes. The move would help as many as 265,000 homeowners…

While clearly different in many ways than the industry-wide announcement of a privately orchestrated derivatives clearinghouse (discussed here), BofA is also pro-actively responding to the financial crisis facing millions of American homeowners that has had ripple effects across the globe.

A cynical perspective might suggest that these measures are simply an attempt to prevent direct intervention by regulators in a system in obvious need of repair, or perhaps they just want the merger to be approved.

However, if one considers that such a move is not only the right thing to do, but also economically-rational, then it appears more likely that this was purely an example of the free-market working. Private market participants are nimble and knowledgeable, and at least if we take BofA at their word, they sometimes do the right thing.

While helping 265,000 homeowners is not going to solve the foreclosure crisis we are facing, it is surely a step in the right direction. Now let’s hope they follow through.

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